VELOCITY The Journal of Travel, Transport & Logistics 2018 - Oliver Wyman
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VELOCITY The Journal of Travel, Transport & Logistics 2018
TO OUR READERS
To paraphrase Bette Davis in “All About Eve,” fasten your seatbelts. It’s going to be a bumpy
decade – but an exciting one.
The theme of VELOCITY this year is disruption and how to capitalize on it. As far as the
eye can see, transportation and related industries like hospitality and logistics are headed
for change – not incremental alterations to which businesses can easily adapt, but rather
fundamental, potentially destabilizing transitions that will require substantial investment,
agility, and new strategic thinking.
The main perpetrator, as it has been since the advent of the internet, is technology. But
where it once took a decade to unhinge an industry, new technologies a few years old now
have the potential to redefine the rules. Take, for instance, smart speakers which only made
their debut in 2015; by the end of 2017, more than 43 million Americans and 100 million
people worldwide owned one, with projections those numbers would more than double
by 2020.
Today, smart speakers are on the cusp of reshaping the travel industry, as we discuss
in the issue of VELOCITY, but the artificial intelligence that makes them possible is
restructuring almost every aspect of transportation – from autonomous vehicles, to
predictive maintenance, to real-time travel information and traffic control. Across the sectors,
technologies are converging to create a future for transportation that used to be reserved for
science fiction.
As we show in our journal, the disruption cuts across every corner of travel and
transportation industries – aerospace, rail, hospitality, manufacturing, and engineering – and
has informed and empowered customers. While the job of technology is to make life easier,
it has made doing business more challenging – if only to stay abreast of the constant change
and decide which revolution du jour is worth your company’s attention.
So, welcome to our 2018 edition of VELOCITY. Enjoy the articles and research, and please
follow up with our partners to discuss their implications for your business. At the back of the
issue, you’ll find contact emails for the authors. We look forward to hearing from you.
From the Transportation Marketing Council
MARKETING COUNCIL EDITORS
Birgit Andersen, Marketing Director Pat Wechsler, Velocity Editorial Lead
Jean Pierre Cresci, Partner Rebekah Bartlett, Senior Editor
Chris Spafford, Partner
DESIGNERS
Tom Cooper, Vice President
Campbell Reid, Creative Head
Adam Price, Principal
Adrien Slimani, Art Director
Kevin Smeets, Principal
Erika Colwill, Designer
Khalid Usman, Vice President
Lorena Mondragon, Illustrator
Katharina Vaubel, Senior Picture Researcher
1
VELOCITY 2018
CONTENTS
A Decade of Mega-Disruption 4
Making the Right Connections 10
The Hurdles Drones Face 14
How Smart Speakers Will Reinvent Travel 18
Meet the New “Made in China” 22
The World Wants Smart Mobility 26
The Last Mile to Autonomy 30
2
Autonomous Traffic Jam 34
Open to Cyberattack? 40
Re-engineering Engineering 44
When Consolidation Makes Sense 48
Recent Publications from Oliver Wyman 52
How to Contact Our Authors 54
3
VELOCITY 2018 A DECADE OF MEGA-DISRUPTION How customer demands, digitalization, and a push for sustainable growth will transform aerospace Jerome Bouchard • Geoff Murray • Lino Stoessel 4
WHEN IT COMES to technological and business websites brought pricing transparency to the sector.
disruption, the aerospace industry has had it That upheaval, against the backdrop of the global
comparatively easy over the past couple of decades. financial meltdown, chipped away at carrier margins and
Aircraft got bigger and then smaller and always more customer relationships and unleashed a competitive
efficient, but the way planes flew and the way they were onslaught that forced consolidation.
manufactured remained essentially the same. For aerospace, that period of relative calm is about
The economic climate confronting aerospace to end as new technology and customer demands
manufacturers was nothing like the tumult that rocked begin to reshape the industry’s business model over the
airlines since the beginning of the millennium, after a next decade. As this wave of mega-disruption sweeps
swarm of online travel agencies and price-comparison the sector, aerospace manufacturers should heed a
5
VELOCITY 2018
The pressure is on for
three disruptor categories will lead to a new era of
safer, more customized, fuel-efficient, and digitally
aircraft and engine
optimized aircraft.
makers to add more Growth and new rivals
sensors to further Today, the aerospace industry is enjoying one of its
most profitable periods, as economic growth in the
enhance the real-time
developing world is helping to fuel unprecedented air
travel demand and a global explosion in the size of the
picture of what’s
fleet and number of airports and hubs around the world.
Already, airframe manufacturers have been producing
happening with planes
record volumes of aircraft monthly. By 2028, there will
be close to 38,000 aircraft in service, up from the current
in flight
26,000; the number of international hubs will increase
to 80 from 60; and revenue passenger kilometers will
be around 12 trillion (7.5 trillion revenue passenger
miles) from the current 7.4 trillion (4.6 trillion revenue
passenger miles).
The growth itself has become one of the disruptors.
And while the barriers to entry in aerospace are
considerable, based on the capital investment and
expertise required, there are potential rivals in the wings
looking to nibble off chunks of business.
For instance, China has begun developing its own
key lesson from the airlines: Incumbents must quickly aerospace industry under a national plan to become a
embrace the big, bold ideas disruption brings – or else global producer in several heavy industrial sectors by
prepare to face off against faster-moving players. 2025. Though many consider it a decade away from
being a real global competitor in aerospace, China has
shown its ability to accelerate its entry into markets in
A perfect storm other industries – including as an automaker and now
Perhaps mega-disruption may seem a bit dramatic, the world’s largest producer of electric vehicles and in
but the forces bringing change to aerospace over the solar panels, becoming the leading world producer in a
next decade are all hitting simultaneously, compelling matter of years, not decades.
aircraft and component makers to overhaul their
manufacturing and repair practices as well as their
product lines. The three major categories of disruptors The impact of digitalization
are digitalization, customer demand, and the need to As it has in most industries, digitalization is
achieve sustainable growth. reshaping aerospace – from the plethora of sensors
By itself, digitalization would be disruptive enough, constantly collecting data on board aircraft to
involving the incorporation of technologies from eventually autonomous flight. Already, there is an
predictive maintenance to autonomy. But sweeping the uninterrupted flow of real-time information coming
industry at the same time as other innovations such as from aircraft updating ground operations and the
3-D printing and modular design means aerospace will pilots on the status of systems, equipment, and
not just be disrupted. It will be transformed. current and impending weather conditions. For
Obviously, customer demand and achieving instance, in the near future, these smart and connected
sustainable growth are perennials for aerospace – as for planes will be able to adjust flight routes using
most industries. But over the next decade, customer real-time data to maximize fuel efficiency, minimize
demand will focus on reduced emissions and “green” turbulence, and even eliminate the wait for the gate
operation, flexibility and innovation in cabin design, after landing.
and development of technology that reduces travel One of the biggest challenges has been to gather
time. Sustainable growth, on the other hand, will and analyze the terabytes of data produced. Yet, the
be concentrated in production line efficiency and pressure is on for aircraft and engine makers to add
agility, expansion into maintenance and other more sensors to further enhance the real-time picture
services, and innovative financing. Ultimately, all of what’s happening with planes in flight – and on the
6
ground, where artificial intelligence is also starting to pilots on board. Gaining public acceptance of these
effect change. advances may be challenging – even though both
In the maintenance end of the aerospace value chain, should enhance safety by minimizing human error.
predictive maintenance – the process of using analytics Still, aircraft makers need to be prepared to
to determine as precisely as possible when an aircraft’s build such aircraft eventually, as well as support the
part should be replaced – is increasingly demonstrating proliferation of autonomously functioning systems
its ability to improve efficiency. While this approach to within aircraft right now. Aerospace giants like Boeing
servicing planes has been available for several years, and Airbus have started divisions developing drones that
airlines and maintenance, repair, and overhaul operations will eventually taxi passengers around cities – with and
are only just now embracing it to help ensure the full without pilots. So too, however, have a bevy of digital
lifespan of parts is utilized, minimize the number of giants and startups.
equipment checks, and maximize the safety of aircraft. For passengers, much of aerospace’s digitalization
should be a win, leading to more comfortable flights
and less waiting because of delayed or canceled flights.
3-D and autonomy While major changes like single-pilot or autonomous
Repair times also will become shorter thanks to 3-D flight will be widely debated, much of the digital
printing of components – otherwise known as additive revolution will take place out of sight of travelers.
manufacturing. This will allow parts to be produced closer
to where aircraft are being repaired. While more efficient,
it’s apt to disrupt aerospace’s complicated global supply Meeting customer demands
chain and potentially disintermediate certain players. Technology is not the only driver of disruption. Airlines
Longer term, the biggest digital disruption of and travelers are demanding change as well. In an
all is likely to be single-pilot operations and even effort to revive customer relationships, carriers are
remote-controlled and autonomous aircraft with no looking to manufacturers for ways to differentiate
THE SCHEDULES FOR DISRUPTION AND TECHNOLOGY WILL LINE UP
TECHNOLOGY MOVES QUICKLY THESE DAYS FROM PROTOTYPES TO FULL-FLEDGED ADOPTION
Today 2020 2025 2030 2035+
Predictive • Growing importance of data analysis
1 maintenance • Market entry of data and tech companies
Connected • Manufacturers to partner with data analytics experts
2 aircraft • Retrofit business of “connecting” the in-service fleet
Digitalization
Autonomous • Disruption of players lacking capabilities
3 flight • New technologies, such as remote controls, needed
Green • Shifts in value chain towards engine makers
4 aviation • New market players for e-engines and batteries
Novel cabin • Standardization and modularization of aircraft
5 design • Consolidation among manufacturers and suppliers
Changing
customer
requirements Superfast • Differentiation of air travel product – fast versus regular
6 air travel • Rising intermodal competition, such as Hyperloop
Flexible • Acceleration of production, higher capacity
7 production • Decentralization of spare part supply chain
Services • Consolidation among manufacturers and service providers
8 expansion • New, bundled offerings including aircraft and services
Push for
sustainable
industry growth New financial • Shift towards fewer, but larger orders
9 models • Asset risk transfer from airlines to manufacturers and financiers
Prototypes exist Industrial maturity reached Further improvement/development
Source: NPR and Edison Research, Oliver Wyman analysis
7
VELOCITY 2018
the service they provide to travelers and attract new Finally, airlines and travelers also want faster flights
customers. One important factor will be ensuring the and better connectivity to other travel modes. Perhaps
nonstop connectivity that digitalization also demands: this could mean supersonic flights from London to
Connected aircraft not only communicate their own Sydney, a SpaceX rocket to get from Beijing to Rio
status, but need to keep travelers online. de Janeiro in time for Carnival, or airports connected
Airlines also want novel cabin design. Aircraft with to city centers by hyperloop. While such long-term,
modular interiors could enable airlines to reconfigure attention-grabbing solutions generate a lot of buzz, they
planes in real time to better utilize unfilled capacity. For will need to balance the desire for speed with the need to
example, if only 80 percent of seats are sold on a flight, reduce emissions and may require the development of
one cabin section could be turned into working space for new types of propulsion before they can be realized.
business passengers, a lounge, or even a kids’ playroom.
Passengers and shareholders – not to mention some
nations and their regulatory bodies – also are demanding New business models
airlines reduce their carbon footprint. Airlines are already All this demand for change will inevitably impact the
working with regulators to increase fuel efficiency, but as business models of manufacturers and force changes
a growing industry that generates significant greenhouse in the way they operate. Expansion into maintenance
gases, aviation will be challenged to do more. Electric and service is an avenue aircraft and engine makers are
engines might be one solution; they come with the added already pursuing as a means of achieving sustainable
benefit of reducing noise, making night flying viable. This and more predictable growth. But providing a full range
would enable people to travel during more convenient of services and support requires manufacturers to
times, reduce airport congestion, and greatly increase consider new financial and ownership structures – such
asset efficiency for airlines. as leasing rather than selling planes – or offering bundles
8of both product and services on a subscription basis. A almost every industry end up being those already figuring
bundle offered to an airline, for instance, might consist out how to get ahead of disruption before it even starts.
of leased aircraft, rapid maintenance, regular cabin
changeouts, and relevant data feeds.
Aerospace manufacturers also will need to develop
much more flexible and rapid production processes for Jerome Bouchard
aircraft, through the increased use of machine learning, is a Paris-based partner in Oliver Wyman’s
robotics, and 3-D printing. As product development transportation practice.
cycles shorten, manufacturers should be able to produce
aircraft that are more responsive to changing customer Geoff Murray
needs. They also will be able to modify designs more is a former commercial pilot and a Chicago-based
quickly as new technologies arise in the future, such as transportation partner who leads the aerospace
the development of new jet fuels or propulsion systems. sector team.
Aerospace manufacturers may be fortunate that
their decade of disruption is arriving during a period of Lino Stoessel
growth and prosperity when they have the resources is a Zurich-based associate in Oliver Wyman’s
to implement change. It also is coming on the heels of transportation practice.
disruption in many other industries, allowing aerospace to
profit from the many lessons learned. And no doubt, the This article originally appeared in Forbes on
biggest lesson of all may be that the ultimate winners in September 4, 2018.
FOR AEROSPACE, IT WILL BE A DECADE OF MORE EVERYTHING
GLOBAL DEMAND IS UP; THE FLEET IS EXPANDING; THE NUMBER OF HUBS IS INCREASING
A growing air transport market… …requires more aircraft… …and more airports worldwide
RPK1 in 2018 and 20282 Global fleet in thousands, 2018 and 2028 Long-haul hubs3, 20184 and 20285
80+
~12 TN 38 +3%
~60
+5% +4%
26
~7.4 TN
2018 2028 2018 2028 2018 2028
1. Revenue Passenger Kilometers, CAGR
2. 2016 base extrapolated at Boeing Current Market Outlook CAGR of 4.7% (2017-2028)
3. Cities with >10,000 long-haul passengers per day (international routes > 2,000nm)
4. 2018 data estimated based on 2016 value of 58 airports
5. 2028 forecast not available, 2026 data indicates 82 hubs
Source: Airbus Global Market Forecast 2017; Boeing Current Market Outlook 2017-2036; Oliver Wyman Fleet & MRO Forecast 2018-2028; Oliver Wyman analysis
9VELOCITY 2018
MAKING
THE RIGHT
CONNECTIONS
Passenger rail can travel a path to more
ridership and revenue through high-speed
digital connectivity
Gilles Roucolle • Jean-Pierre Cresci • Sebastian Janssen • Tilman Apitzsch
10CONVENIENCE, COST, AND COMFORT used to be
the three C’s that explained why passengers chose
one transportation option over another. In the 21st
century, there’s a fourth C that may trump all the
others – connectivity. Today, many people can barely go
five minutes without being connected to the internet
whether through their smartphone, smartwatch,
tablet, or laptop. Why should their time traveling be
any different?
When it comes to transportation, consumers want
more than just uninterrupted online access: They also
CONNECTING TO THE want the ability to work, shop, text, tweet, tag, stream,
CONSUMER: For rail and other or catch up on the news while cooped up in a train,
modes of transportation, the path
to the consumer’s heart and wallet plane, bus, or car – just as they would when not on the
may be through digital services. move. Because they’re traveling, they especially want
fast, flexible, door-to-door trip planning and booking, as
well as real-time travel information – any service that will
save them time and make their journey more productive
and enjoyable.
It should come as no surprise that the future
growth in ridership and revenue will go to the mode
of transportation that proves best at providing what
travelers want in connectivity and digital services.
And while passenger rail has often trailed aviation,
automotive, and bus rivals in offering internet, some of
its leading brands – along with some key technology
players – are starting to invest in strategies that should
help trains get a bigger share of the smart-mobility wave.
Connectivity and 5G
No doubt, rail – whether intercity, commuter rail, or
urban transit – faces a challenge providing dependable
wireless as trains travel at high speeds through tunnels,
underground, and areas with few mobile broadband
towers. During rush hours, railcars can carry densities
exceeding those of typical offices, which means a lot
of competition for bandwidth. All this has often left rail
passengers restricted to texting and sending emails,
forgoing activities like streaming that become fraught
with annoying buffering.
Today, rail manufacturers and operators, often in
partnership with technology companies, are testing
possible solutions – even though some contend
things won’t really improve for rail until the arrival
of ultra-high-speed, ultra-high-capacity wireless 5G
networks. In the United Kingdom, networking hardware
giant Cisco has been working with ScotRail on what is
billed as the world’s fastest train Wi-Fi. The pilot program
on the Glasgow-to-Edinburgh line has reportedly
reached 600 megabits per second in trials.
Virgin Rail trains are trying to get around this
problem by offering BEAM service, a free app that allows
passengers to use onboard servers to stream television
shows and movies and access newspapers, magazines,
11VELOCITY 2018
and games on smartphones and laptops. That’s an an “Idea Train” (Ideenzug) that features a fitness
improvement, but not a long-term solution. studio, meeting space, and gaming consoles. This
French railroad SNCF has installed about 18,000 vision for rail suggests that trains have the potential
antennas on a fleet of 300 trains, along with 4G towers to become extensions of office and home – like what
every three kilometers, to provide coverage for much Starbucks coffeehouses and internet cafes represent
of its high-speed TGV passenger rail network. It is to younger generations and workers who freelance or
also in the process of rolling out 4G on regional and work remotely.
suburban trains. Offering these kinds of experiences, especially to
But 5G may not be that far off. In Japan, 5G is already millennials and Generation Z passengers who are less
being tested on high-speed trains in preparation for the interested in cars and driving than their parents, could
2020 Olympics in Tokyo. create a competitive edge for trains over planes, given
aviation’s time-consuming security and periods in flight
when cellular devices must be turned off; over buses,
No digital services, no go given the ability on a train to walk around and its higher
Ultimately, given the importance of digital services and degree of comfort and amenities; and over cars, given
connectivity to travelers, passenger rail services will have the current requirement that drivers focus on the road.
no choice except to upgrade to full internet access. In a While a future of autonomous cars may portend a threat
recent Oliver Wyman five-nation survey to assess how to rail ridership, driving – even hands-free driving – still
far travelers would go for access to a wide array of digital means the hassles of car ownership, traffic congestion,
services, consumers indicated they would willingly and parking.
switch from their current means of travel and even pay
more for the convenience. (See “The World Wants Smart
Mobility” on page 26.) Fast payback
Why not? Online access and digital services make While a new image for rail won’t come easy or cheap,
the time on the train more productive for working the investment in connectivity is likely to elicit a quick
passengers and more enjoyable for everyone. Following return from increased ridership and new sources of
through on that concept, Deutsche Bahn has created revenue – either from the direct sale of digital services
RAIL COMPANIES AND MANY OTHERS ARE LINING UP TO SUPPLY SERVICES
BASED ON RESULTS IN FIVE COUNTRIES FOR OLIVER WYMAN’S MOBILITY 2040 SURVEY
Global Germany France USA Italy China
Financial/Insurance services
Multimodal door-to-door travel planning
First/last-mile services
Safety
Real-time information
Entertainment
Work and education
Transport operators Digital giants Financial institutions Media providers Innovative startups Not sure
Source: Oliver Wyman Mobility 2040: Smart Mobility survey; Oliver Wyman analysis
12The new vision for rail
onboard or from the ability to maintain profitable
ticket pricing made possible by these new services.
suggests trains have
In Australia, the Victorian government’s Regional Rail
Connectivity Project expects to roll out mobile signal
the potential to become
boosters across the V/Line Vlocity train fleet and is
building 35 mobile towers, in partnership with several
extensions of office and
telecoms. While the project is costing AU$18 million, the
enhanced connectivity is projected to add AU$20 million
home – similar to what
annually to the state’s economy.
Apps offer another quick-turnaround potential
Starbucks coffeehouses
for rail as operators begin digital engagement with
customers – even though it’s increasingly difficult to
and internet cafes mean
secure real estate on customers’ busy mobile devices.
Besides making life more convenient for travelers, apps
to younger generations
provide a constant feed of data to the company about
consumer preferences and behavior.
Although Deutsche Banh is primarily a rail company,
it cleverly helped start Quixxit, a popular train, bus, and
flight planning app. In France, SNCF is realizing new
revenue from its mobile app, which lets passengers book
connections and trips as well as reserve taxis and rental
cars before reaching the station. Onboard food and drink
can also be ordered up from the train’s bar-restaurant.
Not surprisingly, tech competitors recognize the one day and pick up their packages the next. And
possibilities. One of the most potent rivals is Moovit, London’s magnificently renovated St. Pancras station
an urban mobility app that provides real-time, provides everything a traveler needs in one spot. Its
crowd-sourced transport information. Among its St.P app offers real-time travel info, directions to station
investors: Intel and BMW. and city attractions, and exclusive, targeted retail deals
Collaboration and partnerships between rail and for travelers.
non-rail players, such as telecoms, tech startups, In the end, the passenger rail industry should be
retailers and e-commerce companies, are also part prepared to make investments and look beyond its
of this transformation. Even the same car-sharing traditional role. First and foremost, rail must figure out
services that are partially responsible for the drop in how to get hyper-connected today if it ever wants to be
urban transit ridership are likely partners. For example, the first choice of travelers.
Amtrak, the US intercity passenger train operator,
is partnering with ride-share company Lyft to help
passengers get to and from stations, using Amtrak’s app
to book the car. Train operators could also pair up with Gilles Roucolle
entertainment companies to provide on-demand movies is a Paris-based partner and Europe-Middle East
or educational institutions to offer courses or lectures. regional lead in Oliver Wyman’s transportation and
services practice.
Special delivery Jean-Pierre Cresci
In this vision for trains, stations become integrated is a Paris-based partner in Oliver Wyman’s
transport hubs, using smartphone apps to facilitate transportation practice.
door-to-door travel options. Train stations in several
cities are working with a Deutsche Bahn subsidiary Sebastian Janssen
that is testing on-demand, driverless shuttle buses for is a Munich-based principal in Oliver Wyman’s
passengers traveling to or from the station. transportation practice.
Making train stations convenient and fun
destinations – with top-tier retail, restaurants, and Tilman Apitzsch
even cultural events – could help push up ridership. is a Munich-based associate in Oliver Wyman’s
SNCF, for example, is partnering with e-commerce transportation practice.
giant Amazon to add smart lockers at 980 French train
stations, allowing busy commuters to place an order This article first appeared in Forbes on September 6, 2018.
13VELOCITY 2018
THE HURDLES
DRONES FACE
Regulators grapple with the risks of autonomous
flight as they work to incorporate drones into
commerce and the airspace
Dave Marcontell • Steve Douglas • Guillaume Thibault • Robbie Bourke
14THE WORLD OF AVIATION and aerospace is on the cusp California, drones cannot be used to record another
of a revolution based on autonomous flight and drone person without getting consent. And in probably
technology. While today’s drones are used for such the most limiting regulation when it comes to the
tasks as inspecting tracks or power lines and assessing widespread commercial use of drones, they must be
wildfires, tomorrow’s larger models will transform kept in the operators’ line of sight at all times.
industries like construction and retail by carrying heavy Recently, a congressionally mandated report from
cargoes to hard-to-reach places. In less than a decade, the National Academies of Sciences, Engineering, and
traffic congestion and urban pollution could be eased Medicine chided the Federal Aviation Administration
by electric unmanned aircraft transporting people or (FAA), the primary regulator for UAS, for focusing on the
products around cities. risks posed by drones instead of their potential benefits.
Yet, reaching that potential will take new regulation “Fear of making a mistake drives a risk culture at the
and most likely advances in technology to enhance FAA that is too often overly conservative, particularly
safe operation. Despite the business community’s [with] UAS technologies,” the National Academies
impatience with what is seen as a go-slow approach report concluded.
to drones, a failure to sufficiently test and validate Most drone proponents want regulation relaxed
these rapidly emerging technologies could doom that on flying small drones beyond the limit of sight. Here,
blossoming revolution with the first loss of life from a the Academies’ criticism may have some validity, as
drone mishap. Before the technology can be embraced there can be no substantial commercial application
for extensive commercial use, the risks – especially from if businesses must request permission from the FAA
bigger drones – must be identified, and strategies to each time they want to fly beyond an operator’s line
mitigate those hazards must be developed. of sight. Given that drones are essentially relegated to
sparsely populated locations, the FAA could consider
a partial relaxation in cases involving the typical
A world of no under-55-pound drone.
Where do we stand today? In the United States at least,
most federal regulations on drones restrict their use:
Drones, or unmanned aircraft systems (UAS), cannot fly Operating blind and big
over most federal facilities or over people; drones cannot Broader regulation mandating that all aircraft be able
fly at night or within five miles of an airport without to see and avoid other aircraft, however, prevents the
permission; drones must fly below 400 feet and at less agency from a total elimination of the line-of-sight
than 100 miles per hour; with some exceptions, they rule. Drones operate without human pilots, so they
must weigh under 55 pounds (25 kilograms); and they cannot comply. Currently, the Volpe Center, a research
must yield the right of way to manned aircraft. Some unit within the US Department of Transportation, is
states further prohibit the use of drones in hunting; in developing a radar system that would enable remotely
ENTERING THE CITY: Drones
are on the periphery right now.
But government and business
are working to make them
part of the economy.
15VELOCITY 2018
piloted aircraft to detect and avoid traffic at a level ground congestion intensifies, the economic case for
of safety equivalent to the see-and-avoid capability pilotless air taxis gets stronger. Uber Elevate, among
of manned aircraft. But until something like that is others, is pursuing this vision aggressively. Yet, a large
developed, an across-the-board repeal of the rule seems drone carrying one or two passengers raises the risk
imprudent at best. factor exponentially.
Another set of risks that the FAA and regulators It is not difficult to build an all-electric vertical
worldwide must consider involves drone size. takeoff and landing (eVTOL) aircraft that can carry
While there are a lot of interesting uses with sensor passengers – there are about 50 prototypes of these air
technologies and video on smaller UAS, drones almost taxis worldwide. The challenge is figuring out how to
certainly will have to grow well beyond 55 pounds raise drone design reliability standards to be more akin to
to have any real commercial and logistical value. those of commercial aviation, in which a system failure is
Yet, it would be unacceptable from a public safety tolerated every one billion hours of flight. Bigger drones
standpoint to simply remove that prohibition without raise questions of airworthiness and reliability that go
considering – and mitigating – the risks inherent with far beyond the standards that apply in the consumer
large drones. electronics world of drone hobbyists.
If a small, battery-powered drone falls out of the sky, Current commercial drones have a significantly
particularly now when they are barred from operating worse record for failure-free performance. For example,
in populated areas, the risk is minimal. That will change 15 percent of new micro-drones sold today have bugs
dramatically if big UAS begin to travel long distances that will ground them within six months. Regardless of
and run on fuel. To carry multiple packages for delivery the demand and potential for drones, regulators would
services or move heavy equipment, drones will need to be very unlikely to sign off on vehicles with such a low
be similar in size to today’s military drones, which can standard of airworthiness.
weigh almost 5,000 pounds. At that size, a drone falling The history of urban helicopter commuting provides
to the ground in a crash could destroy a building and a lesson on the outcry that follows accidents. In 1977,
pose a lethal threat to anyone in its way. a helicopter landing on the heliport atop the 59-story
Pan Am Building in midtown Manhattan flipped over,
killing four passengers waiting to board and a pedestrian
Airworthy enough for people on the ground. The crash led to the shuttering of the
There is also the inevitable question of human helipad, bankrupted the operator, and essentially doomed
transport with drones. As urban areas expand and widespread urban helicopter transport ever since.
BY THE BEGINNING OF 2018, TOTAL DRONE REGISTRATIONS WITH THE FAA HAD TOPPED ONE MILLION
THE FAA EXPECTS REGISTRATIONS TO TOP THREE MILLION BY 2022 (IN THOUSANDS)
1,200
Small Modeler Registrations1 880,179 Non-modeler registrations
Small Non-Modeler Devices1 120,087
1,000
Date Range Total1 1,000,226
800
600
400 Modeler registrations
200
0
EOY 2015 Q1 Q2 Q3 EOY 2016 Q1 Q2 Q3 EOY 2017 Q1 2018
1. Cumulative FAA registrations of modeler (hobbyist) and non-modeler including commercial and research drones as of January 18, 2018
Source: US Federal Aviation Administration, Oliver Wyman analysis
16Then, there is the possibility of cyber terrorism, Commission and EASA will take the lead in rulemaking
which applies to both large and small drones. Like any for a European drone ecosystem, expected to be finished
digital system, drones and their control systems can be in 2019.
hacked, and the FAA will have to incorporate IT security While the debate over drone regulation is in its
and redundancy mandates to reduce the hackability early stages, there’s little doubt there will be a Grand
of drones as part of any certification standards the Canyon-size gap between what industry would like
agency develops. in certification standards and what the FAA and other
regulators are willing to approve. As it is, tech companies
and startups experimenting with drone technology have
Controlling proliferation moved research operations out of the United States to
Finally, the FAA must consider how to regulate the places like Dubai where regulations are less stringent.
various players using drones, preventing an operator, In the end, a new category of air operator may
for instance, from flying a drone in airspace where it emerge – companies that are certified and approved
poses a risk to the public. For this, technology may need to operate larger drones. Here, the numbers will not
to be developed that could take control of a drone, if it be in the hundreds of thousands but more likely in the
flies outside approved air space, and bring it down in a hundreds. And that transition – from an open-access
controlled manner. system of ownership and operation to one with similar
Even without a fully developed definition of how controls and barriers to entry as aviation and aerospace
drones fit into the national airspace, they are rapidly manufacturing – may be tumultuous as companies vie
proliferating. At the end of last year, the FAA registry for for what is currently an elusive standard of certification.
drones topped one million. More than 800,000 of these
are registered to hobbyists, the rest to businesses. The
FAA projects that by 2022, the number of registered
drones will soar above 3.8 million. That makes for an Dave Marcontell
increasingly crowded sky, substantially raising the risk is the general manager of CAVOK, a division of
of collisions. Oliver Wyman that specializes in air carrier operations
Recently, 10 federally sponsored projects were and certification.
selected to explore what regulations make sense for
drones – testing everything from mosquito control Steve Douglas
in Florida, to medical equipment delivery in Nevada, a vice president at CAVOK, is a retired senior executive
to food delivery in California. For these projects, the with the FAA, where he coordinated the agency’s
FAA has waived current restrictions on drone use so rulemaking and the determination of exemptions
the companies can provide it with data that will help and deviations.
shape a certification process and new rules. Among the
companies involved in these pilot programs: Alphabet’s Guillaume Thibault
Project Wing, Flirtey, Airbus, Apple, AT&T, Intel, is a Paris-based partner specializing in aerospace,
Microsoft, and Uber. drone technology, and autonomy in Oliver Wyman’s
That said, rulemaking is a slow, measured process. transportation practice.
It may be five years before US regulations support the
widespread use of drones in everyday commerce. Robbie Bourke
is a London-based CAVOK vice president who specializes
in aircraft operations and certification.
Meanwhile, in the EU
The economic stakes are high. In the European Union, This article originally appeared in Forbes on
research by the public-private partnership SESAR (for September 10, 2018.
Single European Sky Air Traffic Management Research)
shows that the rapidly developing drone sector could
account for 10 percent of the EU’s aviation market
by 2050 – about €15 billion a year and 150,000 jobs.
Currently, drones are regulated by the European Aviation
Safety Agency (EASA) and various national regulators,
depending on drone size. But the EU is working to
unify its rules, as differences from country to country
complicate cross-border trade and provide uneven levels
of safety. Under a recent compromise, the European
17VELOCITY 2018
HOW SMART
SPEAKERS WILL
REINVENT TRAVEL
The winners will be those who recognize early
the technology’s power and consumer appeal
Scot Hornick • Shri Santhanam • Scott Boland-Krouse • Alex Hill
MARRIOTT RECENTLY TEAMED UP with Amazon to
offer a hospitality version of the e-commerce giant’s
Echo devices in select hotel rooms. Now, when guests
want to order room service or housekeeping, they
can simply ask Alexa, the voice of their disembodied
personal concierge. Travelers with an Alexa device at
home can book a car rental or hotel through Expedia
and Kayak. Similarly, Google Assistant, which can
be used via Google Home devices, smartphones, or
smartwatches, can track flight prices and status, suggest
nearby restaurants, convert currency, give directions,
and provide same-day updates on traffic to airports.
People can even book flights through voice-enabled
Google Search.
On many fronts, artificial intelligence-powered smart
speakers and apps seem poised to become the world’s
virtual travel agents. Virtual personal assistants like
Alexa are moving rapidly from nifty gadgets for techies
to household appliances and mobile devices ingrained
in everyday life. The adoption of smart speakers is
even outpacing that of smartphones a decade ago: An
NPR-Edison Research study found that 18 percent of
adults in the United States, or 43 million people, now
own a smart speaker. Worldwide, ownership exceeds
100 million units and is projected to reach 225 million
by 2020.
If consumers start turning regularly to smart
speakers for their travel needs, they could end up
interacting less and less with traditional airline, hotel,
and even online travel agency brands. Or, if travel
companies are paying attention, such voice-enabled
devices could provide brands with a new front door
to the customer. As happened with the rise of the
internet and mobile apps, winners and losers in
19VELOCITY 2018
the age of conversational AI will be determined by leader in sales of personal assistants, with a 72 percent
whether companies recognize its potential early and share of the market, according to a March Voicebot
act on it. Smart Speaker Consumer Adoption Report. Google has
its extensive search capability and a desire to catch up
with Amazon. Both would like to supplant the online
Most vulnerable travel agencies as the go-to intermediary for travel.
Possibly most at risk in the travel community are some Travel companies would like to increase brand
of the most digitally savvy players in the space – online awareness and reduce their exposure to escalating
travel agencies like Expedia and Booking.com. Several online agency commissions on bookings. Today, those
have already established partnerships with Amazon, and commissions can range as high as 30 percent for smaller
they all have relationships with Google through search. providers and others with less bargaining power to rates
Their first move will be along the lines of what they did in the low teens for large brand-name hotel chains.
when mobile emerged as a powerful channel – they While travel companies could play one tech giant
created apps and acted quickly to make sure consumers against the other to get the best deal possible, more
followed them onto the new device. Yet, more so than likely they will conclude that working with both makes
traditional travel providers, these companies face the most sense. In either case, travel providers need to
possible disintermediation by smart speakers, which will keep two goals in mind: retain and enhance access to the
be capable of aggregating potential travel options on customer and maintain control of the customer’s data.
command. Virtual personal assistants may be able to do For instance, even when using Alexa or Google Assistant
this even better than online agencies, given the amount to execute a booking, hotels and airlines should
of personal data about customers that the big tech negotiate agreements that, for a referral fee, let them
companies will have at their disposal. complete transactions through their in-house channels.
For airlines, hotels, rental car agencies, and the While Google and Amazon may not embrace this
like, the challenge should not prove as disruptive, enthusiastically in the case of smaller brands, the extra
unless we foresee the rise of Google airlines or Amazon fee should allow larger brands to continue to directly
hotels – prospects that, while possible, are unlikely to serve customers.
generate the returns on capital that the tech giants
are used to. The hurdle for traditional providers will
be defending their margins, brand, and relationships Make loyalty count
with customers – challenges they already have had to Loyalty programs represent a treasure trove of data – one
battle at the hands of online travel agencies. Below, that travel companies are only beginning to exploit
we examine three strategies that should not only keep effectively to get closer to their customers. They also may
traditional travel companies connected with customers, provide airlines, hotel chains, and rental car companies
but which also may lead to a healthier industry and more clout when setting up smart-speaker partnerships.
a better travel experience overall – partnering with By offering special rewards and discounts to loyalty
Amazon and Google, leveraging loyalty programs, and program customers through smart-speaker channels,
adapting content while protecting branded search. travel brands could accelerate adoption of voice-enabled
systems, making their partnerships valuable to Amazon
and Google. The stronger the loyalty program – and
Strategic partnerships the more trust customers have in the brand – the
Considering the speed of smart-speaker adoption, travel more leverage they gain with their members and in
providers have a relatively small window in which they negotiations to maintain control over customer data
still have the leverage to negotiate common ground and access.
with the likes of Google and Amazon. Participating As connoisseurs of data, Google and Amazon will
in the earliest wave of partnerships should be an recognize that loyalty programs produce substantially
advantage, as provider clout will be strongest before a more detailed portraits of member preferences and
substantial portion of consumers start using Alexa and behaviors than they can get from their miscellaneous
Google Assistant to plan and book their trips. While purchases and searches. Still, travel companies
tech giants already have some travel-related data from should be cautious and carefully weigh the benefits of
searches and purchase history, the more they can add sharing data. It will be a delicate balancing act: While
to their databases over time through travel queries and the inclination will be for travel companies to circle
transactions, the harder it becomes for travel providers the wagons around their data, the more information
to extract favorable terms. they provide smart-speaker algorithms, the better
Amazon and Google each offer different advantages they can fulfill a customer’s query and the more
as partners. Amazon, for instance, is the undisputed satisfaction customers will derive from the new channel.
20Smart-speaker companies may also create their own voice channels and branded search should reinforce
loyalty programs, à la Amazon Prime, in an effort to loyalty programs and the brand’s identity.
collect more travel-specific data on their own. Smart speakers, still in the toddler stage as far as the
development of the technology, mark the beginning
of a new voice-enabled era of travel. Although travel
Adapt to verbal search providers have not led the pack on customer technology
Over time, smart speakers will be less about the device interfaces thus far, they now have another opportunity,
and more about the technology that allows consumers with a particularly consumer-friendly technology, to
to talk to any device. Travel providers, like most change their image. They should seize it.
consumer-facing companies, need to start thinking
about crafting content that reflects that reality. For
instance, travel companies should consider making
their current Apple and Android apps voice-enabled or Scot Hornick
adding branded “skills” that can be loaded onto Alexa. is a Dallas-based partner in transportation and services
Presumably, this means partnering with a provider of at Oliver Wyman and leads the firm’s North American
that technology – and the best choice may be the one pricing, sales, and marketing practice.
that is the most mobile. Indeed, Apple already offers a
Siri software development kit to allow app developers to Shri Santhanam
tie into its smart assistant technology. is a San Francisco-based partner in Oliver Wyman’s
In the age of Alexa and Google Assistant, branded digital, technology, and analytics practice.
search terms could also become even more important
than they are now. How many times does the waiter at Alex Hill and Scott Boland-Krouse
your favorite restaurant get to the end of the specials, are principals in the firm’s transportation practice.
and you no longer remember the first one? Listening Alex is based in Chicago and Scott is in Dallas.
to a voice search can pose a similar challenge when
you’re asking about hotel or flight choices. Google has Alex Viviano, a Dallas-based senior consultant, contributed
found that online searches with branded keywords research that made this article possible.
have a conversion rate – turning a search into a
transaction – over two times higher than searches This article first appeared in Harvard Business Review on
without them. So, encouraging branded voice search August 7, 2018.
should become a priority. One can imagine hotel chains
or airlines providing discounts or loyalty-point bonuses
to customers who use a brand in a conversational AI
query, such as “book me a flight on Southwest to Dallas
Tuesday night.” Providing added inducements to use
43 MILLION ADULTS IN THE UNITED STATES OWN SMART SPEAKERS
35–44 45–54 Women
21% 24% 54%
25–34 By age By gender
18%
55+ Men
22% 46%
18–24
15%
Source: NPR and Edison Research
21VELOCITY 2018 MEET THE NEW “MADE IN CHINA” Why China’s latest aspirations should make aerospace and Western manufacturers nervous Jerome Bouchard • Matthieu Barbiery 22
WHEN A TWO-YEAR-OLD Chinese startup unveiled the these sectors in large part because of concerns over
Byton – a high-end, artificially intelligent, fully electric quality and safety. But the fact that Future Mobility Corp.
sport utility vehicle that is 40 percent cheaper than a was able to poach some of the biggest names in tech
Tesla Model X – at this year’s Consumer Electronics Show and electric vehicles from companies like BMW, Google,
(CES), it threw down the gauntlet in the race to develop and even Tesla to develop the Byton shows how quickly
“intelligent” electric cars. The move signaled that the landscape can change and how Western companies
Chinese manufacturing has entered a new phase. cannot afford to be complacent.
Already among the world’s largest producers of The Byton has the financial muscle of the nation’s
personal computers, solar panels, and integrated “Made in China 2025” initiative behind it. The 10-year
circuits, China is also quickly becoming a major supplier program is dedicated to help China take on top-tier
in aerospace, electric cars, and robotics. Until now, manufacturers in the United States, Europe, and Japan
Chinese producers have been held back from entering in industrial sectors once considered too technologically
ON THE ASSEMBLY
LINE: A worker turns his
attention to an auto
frame – part of China’s
global push into
industrial products
like cars and jets.
23VELOCITY 2018
sophisticated for low-cost, mass production, like reminiscent of Japan’s battering of the US auto industry
robotics, biopharma and advanced medical equipment, in the 1970s when Detroit ignored the success of small
aerospace, power generation, and rail. cars and kept producing gas-guzzling behemoths.
When companies have national and provincial
support and access to low-cost capital, things happen
Chinese momentum quickly. Beginning in 2007, China provided as much
China’s ambitions to transform itself into a leading as $18 billion in cheap capital for its then-fledgling
manufacturing power has been greeted thus far by an solar panel industry. By 2012, major European and US
astounding lack of concern, or even curiosity, among solar panel manufacturers were filing anti-dumping
European and US industrial incumbents. To be sure, challenges; by 2015, seven of the top 10 solar-panel
Chinese electric cars have been unveiled in the past manufacturers were Chinese, and China controlled
and not made it beyond China, the biggest market almost half of the photovoltaic solar market.
for EVs in the world. Worse, some have ended up in
bankruptcy. Nonetheless, the Byton, which is said to be
aiming for a production of around 300,000, has global More M&A deals
ambitions and demonstrates China’s capacity and As China pushes forward with “Made in China 2025,” it
unwavering determination to make it happen – perhaps is pursuing strategic mergers and acquisitions, buying
well before 2025 in some sectors. And with Guangzhou up Western operations to expand its presence in these
Automobile Group still rumored to be eyeing a bid for manufacturing industries, and acquiring proprietary
Fiat-Chrysler and showing up at the North American technology. In Europe alone, the value of Chinese
International Auto Show in Detroit this year with a new M&A deals in aerospace, automotive, electronics, and
electric car aimed at digital natives, it’s clear that China machinery jumped from $3.8 billion in 2014 (before the
is pushing forward. “Made in China” initiative was launched) to $14.6 billion
This means that Western manufacturers owe it to in 2015, and more than $22 billion in 2016.
their stakeholders to prepare strategies, including Recently, the Chinese group Midea acquired
increased investment in research and development, German robot manufacturer Kuka, an illustration
to fend off the threat of a new lower-cost competitor of how China is actively buying technology it sees
on their turf. And that preparation needs to begin now, as critical. Midea committed to maintain Kuka’s
not after China has launched products that match and headquarters in Germany and support Kuka’s
surpass the West’s. To wait would create a situation development strategy until 2023. Nevertheless, Kuka’s
CHINESE ACQUISITIONS IN EUROPE TAKE OFF AFTER “MADE IN CHINA 2025” IS ANNOUNCED
ANNUAL INVESTMENT IN AEROSPACE, AUTOMOTIVE, ELECTRONICS AND MACHINERY SECTORS
(IN BILLIONS OF US DOLLARS)
22.7
14.6
3.3 3.8
2.4
1.7
1.0 0.8
0.2
2008 2009 2010 2011 2012 2013 2014 2015 2016
Source: Dealogic, completed or pending deals
24intellectual property remains at risk over the long
term as does Germany’s strategic position in the
robotics industry.
China’s state-owned enterprises (SOE) also are
consolidating to achieve size and brand recognition
and acquire critical technology. For instance, in
June 2015, China Railway Rolling Stock Corp. was
created from two SOEs and became the largest
rolling stock manufacturer in the world. Similarly,
in August 2016, Aviation Industry Corporation
of China and Commercial Aircraft Corporation of
China joined forces with the Chinese government
to set up Aero Engine Corporation of China.
Jets made in China
With Aero Engine, China hopes to accelerate the
development of indigenous commercial aircraft
The West needs to prepare
engine and aircraft production and eventually
build an industry. Here, China bumps into
now for the potential
stringent global safety regulations and certification
requirements that pose sizable hurdles its
of a new, low-cost
manufacturers have yet to overcome.
Still, China has leverage from the size of its
competitor – not after
domestic market, which on its own can sustain
substantial production. And in the case of
China launches products
any “Made in China” industry, there’s always
the possibility of regulatory measures against
that match and surpass it
foreign competitors, especially given the rise of
protectionism worldwide.
The potential for disruption from “Made
in China 2025” is great, and Chinese foreign
direct investment could translate into a potent
technological force capable of taking on
competitors like General Electric, BMW, and
Airbus. The uncertainty is more in the timing – a
question of when, not if, China will crack the global
marketplace in cars, rail equipment, aerospace
production, or robotics. But the speed at which the
Byton came to fruition shows the future will likely
be realized in a matter of years – not decades. So
those who choose to wait will likely play catch-up
when these what-ifs become reality.
Jerome Bouchard
is a Paris-based partner in Oliver Wyman’s
transportation practice.
Matthieu Barbiery
is a Paris-based senior consultant at Oliver Wyman.
This article first appeared in Forbes on
January 15, 2018.
25VELOCITY 2018
THE WORLD WANTS
SMART MOBILITY
Survey says: Consumers would pay more and even switch
modes of transportation to get seamless digital services
Joris D’Incà • Patrick Lortie • Anne Pruvot
26THE FUTURE OF EFFICIENT, seamless, and personalized
transportation gets closer to reality each year. Right now,
it’s seen in apps that order rides or book travel with a
click or smartphone alerts that tell passengers how long
until the next subway arrives. It’s the apps that show
drivers where to find parking spaces.
Not too many years from now, the same kind of
centralized databases and platforms that make today’s
apps possible will give people access to driverless cars
on demand and adjust the flow of city traffic, based
on real-time data feeds. Commuters will be able to
swap travel options on the fly, jumping from driverless
ride-sharing to autonomous bus-train connections to
avoid delay.
All this will be part of “smart mobility” – the future’s
digitally connected approach to today’s travel problems.
With smart mobility, digital platforms will be designed to
manage the travel experience from end to end and allow
consumers to plan, book, and pay for their trips through
one outlet – even if several providers are required to
complete the journey. Only a few clicks away, integrated
travel services like route maps, real-time travel
information, real-time seating choices, and advanced
porter booking will be available.
The rewards of being smart
Right now, businesses are rushing to develop
smart-mobility platforms and services, including travel
operators like airlines and rail companies, digital giants
such as Google and Amazon, and savvy technology
startups. The rewards of unlocking smart mobility could
be vast: Innovative mobility services are projected to see
a fivefold increase in their share of travel spending by
2040 and generate an estimated $270 billion in revenue
and up to $150 billion in profit for providers.
But are consumers ready to embrace smart mobility?
Oliver Wyman conducted a survey of 7,500 consumers
across Germany, France, Italy, China, and the United
States, and it turns out the majority are ready to change
their preferred mode of transportation and pay more to
get access to these kinds of services.
The percentages of consumers who consider smart
mobility important are overwhelming: In China, a
stunning 98 percent of those surveyed ranked it as
important or very important; in Europe, 93 percent; and
in the United States, 83 percent. Among respondents
18 to 35 years old whose principal transportation is
a private car, 97 percent said they would consider
switching to public transportation to gain access
to smart-mobility services. Even among those 65
ONBOARD EQUALS ONLINE. and older, 76 percent said they would consider a
Travelers put a high priority on change. For those who use public transportation,
being digitally connected and
on services that make trips similar percentages would move to automobiles for
easier and more productive. smart-mobility advantages.
27You can also read
